The dairy sector represents 6.5% of Uganda’s agricultural GDP and is a major source of income and employment for many people in the ‘cattle corridor’ – a stretch of rangeland covering more than a third of the country. However, with less than a third of Uganda’s population having access to electricity, the development of the industry is limited. Heifer International estimated that 50% of the country’s milk collection points, are off-grid and rely entirely on diesel generators to preserve milk. The cost of fuelling backup generators accounts for 40% of their operating costs. Even those connected to the grid frequently use backup generators due to power outages, lasting up to eight hours a day, resulting in considerable post-harvest losses and low profitability for farmers and dairy producers.

To address this, Heifer International was selected to receive funding from PREO to implement the ‘Solar for Sustainable Income in Dairy’ project, providing solar-powered milk chilling solutions at dairy cooperatives across Uganda. In August 2023, Heifer commissioned a 41.4 kilowatt-peak (kWp) photovoltaic (PV) solar system for the Migina Milk Collection Center, with two more centres solarised since then. This has resulted in significant benefits, including reduced milk loss, lower energy costs, and increased farmers’ income.

The project aimed to demonstrate that solar-powered technologies can transform rural dairy value chains nationally and mobilise collaboration among key players – such as solar technology suppliers, impact investors, dairy cooperatives, and processors – to accelerate the adoption of solar technologies in rural dairy production, to establish a viable model. After the project concluded in December 2023, PREO spoke with William Matovu, Uganda Country Director and Africa country strategy Lead at Heifer International, to delve into the insights gained, the impact achieved, and the potential benefits for the sector as a whole.

Q: Could you tell us about your goals and objectives when undertaking this PREO- funded project?

A: The goal was to increase income growth for all actors in the dairy value chain, close business inefficiencies, and improve profitability by reducing post-harvest losses incurred at the milk collection centres run by the dairy cooperatives. To achieve this, we set out the following specific objectives:

• Demonstrate increased income growth and profitability for farmers, producer organisations, and processors by deploying solar-powered milk chilling in five producer organisations.
• Prove the financial viability of solarisation at the milk collection centres through savings from avoided diesel consumption and reduced post-harvest losses.
• Expand the ecosystem for solar energy technology service providers in the dairy sector.

Q: What roles do producer organisations (cooperatives) play in the Ugandan dairy value chain, and what methods are usually deployed for reliable milk chilling?

A: The core role of producer organisations is to collectively ‘bulk’ milk (the process of collecting and aggregating milk from multiple smallholder farmers into a larger volume) from farmers and ensure access to market by selling it to processors.  This arrangement provides smallholder farmers with a long-term opportunity to earn a sustainable income. In addition, Producer organisations serve as channels for the supply of quality seeds, insurance and other financial services, mechanisation, training and extension services, as well as agro and other farm inputs.   

On-grid cooperatives use the grid as the primary source of power, and diesel generators as a backup, during power outages for milk chilling. In contrast, off-grid cooperatives rely solely on diesel generators for power and have no backup solution if the generator breaks down.

Q: When benefits can renewable energy offer to dairy cooperatives to meet their cooling needs, and why have Distributed Renewable Energy companies (DRE) not penetrated this market?

A: Dairy cooperatives can benefit from renewable energy in a number of ways for their cooling needs – due to the challenges of unreliable grid electricity and the high costs associated with backup power sources, such as diesel generators. Most dairy smallholder farmers are in remote, off-grid rural areas, and the cooperatives that bulk and cool their milk rely on generators. Even in areas with electricity access, farmers face challenges with unreliable grid supply. In both cases, farmer cooperatives operate diesel powered generators, whose running costs make up to 40% of their operational budget. This expensive and unreliable source of electricity reduces the income of small-holder farmers and the profitability of the producer organisations. Power outages and inadequate cooling lead to milk losses and low-quality milk, which is then sold at lower prices on the open market, resulting in revenue losses of 5-10% for producer organisations.

DRE companies have not penetrated this market due to the low demand for renewable energy solutions by cooperatives, attributed to several factors:

• High upfront investment costs, making renewable solutions less cost-competitive compared to the initial costs of diesel generators.
• Lack of appropriate financing mechanisms in rural areas to support solar development and promotion, with available financing being expensive and not tailored to rural groups of farmers.
• Limited awareness of the potential benefits of solar power for productive use in the dairy sector.

Q: Could you describe the financial product offered to dairy cooperatives? Who were the partners involved, and how easy or difficult was it to convince them of the value proposition?

A: lease to own agreement was found to be the most suitable for the pilot cooperatives.  Under this agreement, the cooperative takes a loan from a financial institution for the installation of the system and then makes quarterly repayments for the agreed lease period. The repayments are funded through milk sales by the cooperatives and the energy savings from reduced operational costs after switching from diesel generators to the renewable energy solution.

For the pilot cooperatives, PREO provided a 30% grant subsidy , covering technical feasibility assessment, business modelling, training, and operations and maintenance. The remaining 70% of the CAPEX was funded using a loan from an impact investor – Heifer Impact Capital – at an affordable interest rate of 9% for a period of 10 years. After the lease agreement was signed between the cooperative and the impact investor, an installation and maintenance contract was then signed between the contractor, cooperative and the impact investor to guarantee the operation of the system.

Convincing the different parties of the value proposition involved many engagements to explain the financing model and its benefits for all the parties. Through the project we learned that financing models involving more than two parties require more time to align the interests of all the parties, leading to a slow decision-making process. Moving forward, this has to be factored into the overall planning to allow the different parties to understand the financing model and engagement process.

Q: What key challenges did you encounter during the implementation of the PREO-funded project, and how did you overcome them?

A: We faced multiple challenges that required creative solutions.

• Delays in evaluation of the Engineering Procurement and Construction (EPC) proposals. Solar companies often did not provide sufficient information, delaying the evaluation process. Our procurement team held several clarification meetings during both the technical and financial evaluation stages. We negotiated based on price, proven brands, availability of spare parts, durability of components, after-sales support, and component compatibility.

• Budget constraints. The project had a target of installing five solar solutions, however, at scoping stage the available project budget did not allow us to undertake all sites.. So, we decided to pilot with three solar plants and install the other two in a scale-up phase.

• Contracting delays due to multiple engagements with the cooperative before they accepted the solar financing terms and conditions. We held meetings with the cooperatives to explain the final business models, financing offer terms and conditions, and repayment schedules. The cooperatives also had several internal consultations before providing feedback on the business models and repayment terms. The feedback from the cooperatives resulted in revision of the models to ensure that they were comfortable with the proposed terms for adopting the solar installations. Consistent follow-ups ensured the process concluded.

• Complex contracting arrangements. The involvement of multiple parties (Heifer International, Heifer Impact Capital, contractor, and cooperatives) required extensive  engagements, causing further delays in decision-making.

• Logistical challenges. Delays in importing solar PV components by the contractor necessitated an extension of the project timeline from 31^st March to 30^th June 2023.

• Site change delays. The failure of Kiboga Dairy Cooperative to meet its loan obligations led to a change in the project site and delays in installation of the second solar system. This required quick identification of an alternative site, the Kiryanyonza Milk Collection Centre, and additional approvals.

• Delays in installation and contracting of the second solar system. The new site had higher energy demands than the equipment acquired for the original site could satisfy. This required discussions with the cooperative to approve the option of powering part of their load and implementing energy efficiency recommendations. It also required an updated business model for the impact investor, demonstrating the financial capacity of the Kiryanyoza Centre to handle the costs of solar plant repayment, purchase of diesel to power the rest of the load, and the cost to implement the energy efficiency recommendations.

• Longer lead times reported by suppliers due to high energy demand caused delays in sourcing and delivering solar equipment for the Nabitanga site. The contractor had to update the implementation plan and request an extension.

• Civil works delays. Heavy rains from October to December 2023 destroyed roads and bridges, delaying the completion of civil works and construction of the powerhouse. Installation could only commence after the powerhouse was completed in December 2023.

Q: Taking one of the dairy cooperatives as an example, can you provide details of the renewable energy installation and the resulting financial impact on the cooperative?

A: Sure, we can talk about the first off-grid solar PV system, a 41.04kWp with battery storage, which was installed at the Migina milk collection Centre for the Dwaniro Dairy Cooperative.

Energy cost savings. The cooperative has seen a significant reduction in its energy cost over the last 6 months following the transition from diesel generators to renewable energy. 

• In the year prior to adopting solar power, the cooperative consumed a total of 24,285 litres of diesel (averaging 2,024 litres per month), costing the cooperative $35,185 ($2,932 per month on average).
• Post-transition, diesel consumption dropped by 93% to 145 litres per month, with several months showing no diesel consumption at all. The monthly costs have also reduced to $190.
• Previously, the cooperative spent an average $36,450 annually on fuel and generator maintenance. With the solar system now in place, their annual expenditure is projected to be $19,440, resulting in a 46% of their energy costs during the loan repayment period a remarkable 95% savings post-full payment. This outcome exceeds the project’s objective of reducing cooperative energy costs by 60%.

Reduced losses and spoilage of milk. Since the solar system was installed at the Migina milk collection centre on 2^nd June 2023, the cooperative has successfully chilled 1,274,742 litres of milk (valued $323,641) over a 7-month period without any losses thanks to the consistent availability of power. This stands in stark contrast to the period before the solar system installation, when the Cooperative suffered monthly milk losses worth $2,653 due to generator breakdowns.

Increased chilling capacity of Migina Milk Collection Centre. The cooperative has registered a 22.6 % increase in milk suppliers, going from 164 to 212 farmers in just 5 months. This has led to a corresponding increase in the volume of milk collected, chilled, and sold to the processor, rising from 536,215 to 541,206 litres.

Plan for savings as a result of solar installation. The board members pledged to allocate the energy cost savings as additional income for the farmers and to set up another business line for the cooperative, such as a shop, to utilise the surplus power generated by the solar system. The alternative business venture is expected to boost revenue for the cooperative and its members.Increased employment opportunities. The Project has led to an increase in jobs opportunities at both the Beneficiary and Grantee levels. Full-time positions include a project manager hired by Heifer International, as well as four engineers and four technicians employed by contractors. Additionally, four technicians were trained to manage and maintain the systems at the end user level. Part-time roles involved 20 local labourers in civil works. Further job creation is expected during the installation of the remaining systems and through additional income-generating activities established by the cooperatives to utilise surplus solar power.